Wim Louw Proudly Supported by Lerato Thwane Management’s responsibility to review internal controls and to provide assurance that internal controls are functioning effectively Introduction On a number of occasions the issue that management should take the responsibility of evaluating the effectiveness of internal controls has been raised. I am of the opinion that management relies too much on the internal auditors to provide assurance that internal controls are either functioning effectively or that there are internal control deficiencies. In terms of section 62 (1) (c) of the MFMA, the Accounting Officer of a municipality is responsible for managing the financial administration of the municipality and must for this purpose take all reasonable steps to ensure that the municipality has and maintains effective, efficient and transparent systems : of financial and risk management and internal controls; and  of internal audit operating in accordance with any prescribed norms and standards. In terms of Section 77 (2) of the MFMA the top management must assist the Accounting Officer in managing and co-ordinating the financial administration of the municipality. Lastly in terms of section 78 (1) (a) of the MFMA each senior manager of a municipality and each official of a municipality exercising financial management, must take all reasonable steps within their respective areas of responsibilities to ensure that the system of financial management and internal controls established for the municipality is carried out diligently. It is therefore evident that every official in the municipality is responsible for ensuring that internal controls are established and maintained, however it is clear that top and senior management are primarily responsible for the establishment of the internal controls and evaluating whether those systems are functioning effectively. Control Environment 1. Demonstrates commitment to integrity and ethical values. 2. Exercises oversight responsibility. 3. Establishes structure authority and responsibility. 4. Demonstrates commitment to competence. 5. Enforces accountability. CONTROL COMPONENTS AND PRINCIPLES Risk Control Information Assessment Activities and Communication 6. Specific suitable objectives. 7. Identifies and analyzes risk. 8. Assesses fraud risk 9. Identifies and analyzes significant change. 10. 11. 12. Selects and develops control activities. Selects and develops general. controls over technology Deploys through policies and procedures. 13. 14. 15. Use relevant information. Communicates internally. Communicates externally. Monitoring Activities 16.Conducts ongoing and/or separate evaluations . 17 Evaluates and communicates deficiencies The diagram is a useful framework for creating awareness of the components and principles of the internal control framework and will promote a better understanding of © 2014 EYGM Limited. All Rights Reserved. The work we do with local government builds trust and confidence in South Africa. Through our services we help our clients to improve and grow, leading to higher delivery standards and more opportunities for growing local economies. In so doing we play a critical role in building a better working world for our people, our clients and our communities. @EY_Africa ey.com/za Proudly Supported by 4440 BN 0914 There’s a solution for all your mobility needs Get all your vehicle and asset finance solutions from the bank that’s here for you to prosper At Absa Vehicle Management Solutions, we’re just as committed as you to seeing your business go places. We use our industry-specific expertise to tailor-make the right fleet funding solution for you. Contact us on 031 566 7701 or [email protected] Absa Bank Ltd Reg No 1986/004794/06 Authorised Financial Services Provider Registered Credit Provider Reg No NCRCP7 BACK TO THE BASICS OF MANAGEMENT AND GOVERNANCE for a better future A Tuesday Joke: Basic lessons in management: Lesson 1: An eagle is sitting high up in a tree resting. A rabbit comes along and asks: “Can’t I join you in sitting and doing nothing?” “Sure”, the eagle replies. The rabbit sits down under the tree and for a long while both do nothing. Suddenly a fox jumps out of the woods and gobbles up the rabbit. The lesson is that in order to sit and (seemingly) do nothing, you have to be high up in the organisational tree. Lessons 2 to 4: A little bird was rather late in migrating north for the winter. It sits on the ground too cold to fly. A cow comes past and shits all over the freezing bird. Due to the heat of the dropping, the bird soon feels better and starts chirping away. A cat close by hears the chirping, comes up and digs the bird out of the shit. He shakes it a few times and then eats it. There are some life and management lessons here too: 1. Not everyone that shits on you is your enemy 2. Not everyone that gets you out of shit is your friend 3. When you are deep in the shit, just keep very quiet. Incidentally, you may have wondered where the word SHIT comes from. Before the production of modern fertilizers certain types of manure were very useful in agriculture. Bundles of dry manure were transported in the hold of a ship. The dry manure came in contact with water splashing in the hold and started fermenting. Methane gas was formed and when a sailor came below with a lantern BOOOOM! After a few such fatal accidents the instruction was to store the manure so that it would not come in contact with water. Thus Ship High In Transit. Many people wrongly believe that it originated as a golfing term. It does show that safe management practice originated long before modern times. 2015 AUDIT AND RISK INDABA 20 to 22 April 2015 Durban ICC SAVING WATER. SAVING LIVES. The only meter that gives the ability to: • Operate as either conventional or prepaid • View your current and previous month water bill • View your remaining free water • View your available credit (Rands) • Purchase credit from your cell phone or convenient stores • Detect your property leaks • Electronically lock your meter 523 Church Street • Provisus Building • 1st Floor • Arcadia • Pretoria t +27 012 440 9885 • f +27 012 440 9751 • email [email protected] Naphtali Motaung, Executive Sales & Marketing Manager • t 072 736 2995 www.lesira.co.za JOKES F OR THE DAY Proudly Supported by scenario of only 3% per annum, the Municipality would earn an additional R 3.3 million from this suburb only for the 3 outer years of the maximum 7 years’ validity period allowed for a GV, by limiting the validity period of the GV to 4 years, revaluing properties and issuing a new general valuation roll in year 5. The impact of just one suburb on the total revenue income in this scenario would be approximately 5% for the current financial year of R 61 million. The budget for a GV would be approximately R 2 million, which leaves a net revenue benefit of about R1.3 million for years 5 to 7 for this one suburb only. OPTIMISING REVENUE THROUGH MANAGEMENT OF THE VALIDITY PERIOD OF A MUNICIPAL PROPERTY VALUATION ROLL Erina Otto (Principal) and Elke Roos (Snr Manager: Property Valuation), i @ Consulting (Pty) Ltd The MPRA and general valuation roll validity periods With the implementation of the Amended Municipal Property Rates Act (MPRA) municipalities will have the option to extend the validity period of General Valuation Rolls (GV’s) from the current 4 years to 7 years. It is natural for municipalities to opt for the longest possible validity period to avoid the seemingly unnecessary effort and cost in producing more frequent GVs. However, this article demonstrates the significant impact on municipal revenue when different validity periods are selected for GVs, which may compel a municipality to publish GVs more frequently. This article also offers advice in selecting the appropriate validity period. The net additional revenue to be generated by adopting shorter GV validity cycles are demonstrated by considering property Triggers that inform the decision on the GV validity period rates revenue impacts in the Knysna and Hessequa Municipalities under conditions of high and low property value growth It is also possible that some areas within municipalities might show a decline in property values over the same 7 year period. It scenarios over a 7 year period. is thus extremely important for CFOs to regularly test the property markets within their areas to determine if it would be feasible for them to undertake new Valuation Rolls or extend their current Valuation Rolls to optimise revenue. The following triggers High property value growth scenario assist a municipality to make the decision as to whether to shorten or lengthen the GV’s validity period: First, consider a high property value growth scenario by considering the case of Thesen Island located in the Knysna Local Municipality. New GV 4 year cycle Extended 7 year cycle Rates tariff increases of municipalities with current market GV values will be more in line with CPI inflation. Rates tariff increases substantially higher than CPI inflation due to undervalued properties. GV values used as baseline for land and investment property values in asset register. GV values will be dated, municipalities will have the expense of appointing valuers for land and investment property valuations for asset register purposes. Cost saving obtaining a deeds dump due to multiple uses such as GV (4 year cycle) and SLUMA (4 year cycle). Increased municipal expenditure to obtain updated deeds for projects completed during staggered cycles e.g. GV (7 year cycle), SPLUMA (4 year cycle). Ratepayers are more confident and informed after every GV process. Decrease in ratepayer confidence when current market GV values are compared with 7 year old undervalued GV values. Conclusion As illustrated in the above case studies the following are the expected potential implications of extending the validity period of a GV to 7 years: � The revenue budgets of municipalities are severely impacted with undervalued properties; � Unsatisfied rate payers for overvalued properties; � Complications in updating of asset register land values and investment properties values with current valuation roll market values which is mostly used as a baseline; and � When there is no incremental increase of values the ratepayers and public struggle to digest large property rate increases. In conclusion, it is generally beneficial for municipalities to publish general valuation rolls at more frequent intervals. In normal market conditions property values increase over time and more frequent general valuation rolls timeously capture those value increases that benefit municipal revenue budgets. More regular general valuation rolls also benefit the community, as ratepayers are allowed the opportunity to adjust to increased property rates in an incremental fashion. Visit our website www.iatconsulting.co.za for more information regarding the 37 amended clauses of The Municipal Property Rates Amendment Act. QUOTES F OR THE DAY GOLF DAY PRESIDENT’S Even in g